As the stock market fell to five-year lows during the week, investors moved to less risky investments. Treasury markets were the primary beneficiary of the flight to safety, and Treasury yields reached the lowest levels in decades. Mortgage rates fell during the week as well, but to a much lesser extent.

The news during the week on inflation pointed to lower future levels. The October Consumer Price Index (CPI) inflation report showed a large monthly decline in the overall index due to lower oil prices. The core rate, which excludes food and energy, saw its first monthly decline in over 25 years, and the annual rate fell to 2.2% from 2.5% in September. Oil prices have continued to move even lower this month, which will be reflected in the November data. Lower expected inflation is almost always a good thing for mortgage rates.

In the housing sector, October Housing Starts fell to a record low, and Building Permits, a leading indicator, fell 12%. These were weak numbers, but a decline in new home building will reduce the number of unsold homes on the market, which should help to stabilize home prices sooner. The recent decline in home prices has one bright spot. Combined with relatively low mortgage rates, homes have reached their highest level of affordability in four years, according to the National Association of Home Builders (NAHB). The NAHB index compares the cost of paying for a home, based on average home prices and mortgage rates, to the median household income. Increased affordability allows more people to participate in the housing market and should boost demand.

Compliments of Corey Phelps, Front Street Mortgage, (231) 360-7283, email corey@frontstreetmtg.com

This week’s economic data and comments from Fed officials confirmed the economic outlook shared by most investors, namely that the economy is slowing sharply. Wednesday, the Fed cut the target Fed Funds rate by one half point to 1.00%, as widely expected. The vote was unanimous and followed a coordinated half point rate cut on October 8. Investors believe the statement left the door open for further rate cuts and have priced in another half point rate cut before the end of the year. The Fed appears to be most concerned with boosting near-term economic growth. While aggressive short-term stimulus is good for the stock market, mortgage investors are worried about its impact on long-term inflation, and those concerns helped pushed mortgage rates higher during the week.

A second factor also contributed to this week’s rise in mortgage rates. The federal government’s takeover of Fannie Mae and Freddie Mac in September left mortgage investors with the impression that there was explicit government backing of the debt and guarantees issued by Fannie and Freddie. Government officials have been sending mixed messages, however, raising some concern about whether the two companies really will have the long-term backing of the government. Due to the uncertainty, investors, particularly important foreign investors, have been reluctant to invest in Fannie and Freddie guaranteed mortgage backed securities. Yields required by mortgage backed security investors directly affect most mortgage rates. If the government were to unambiguously convince investors that it will stand behind Fannie and Freddie guarantees, then mortgage rates could be expected to move lower.

Thanks to Corey Phelps, Front Street Mortgage, (231) 360-7283, email: corey@frontstreetmtg.com